Dividend vs Bonus: The Tax-Efficient Choice for 2025/26

Dividend vs Bonus Comparison: Which Is Right for You in 2025/26?

Blog Title & Excerpt

Title: Dividend vs Bonus: Your Tax-Efficient Guide for 2025/26

Excerpt: Deciding whether to take a bonus or dividend from your company involves complex tax calculations. In 2025/26, the choice between these two income strategies can significantly impact your take-home pay. Discover the key differences, tax implications, and which option might work best for your circumstances.

Full Blog Content

Introduction

As a director or business owner, one of the most important decisions you'll make each year is how to extract profit from your company. Should you take a bonus as salary or receive a dividend? The answer isn't straightforward—it depends on your personal tax position, your company's profits, and upcoming changes to dividend tax rates.

With dividend tax rates increasing from April 2026, now is the perfect time to review your income strategy and understand which approach could save you the most money.

Understanding the Key Differences

What is a Bonus (Salary)?

When you take a bonus, it's treated as employment income and processed through PAYE (Pay As You Earn). This means:[1]

Income tax is deducted at source at the standard rates: 20% (basic rate), 40% (higher rate), or 45% (additional rate)
Employee National Insurance contributions are calculated at 8% of earnings above the upper earnings limit
Your company pays Employer National Insurance at 15% (with a £5,000 secondary threshold)

The advantage of bonuses is that they're deductible against your company's profits, reducing your corporation tax bill.

What is a Dividend?

Dividends are payments made from your company's post-tax profits. Key characteristics include:[1][6]

No National Insurance contributions (employee or employer)
Taxed at lower rates than salary: 8.75% (basic rate), 33.75% (higher rate), and 39.35% (additional rate)
Subject to a £500 annual dividend allowance
Must be paid from genuine profits after corporation tax has been deducted at 19-25%

Tax Rates for 2025/26

Income Tax Bands (England, Wales and Northern Ireland)

The 2025/26 tax year uses the following income tax bands:[1]

Personal allowance: £12,570 (tax-free)
Basic rate: 20% on income from £12,571 to £50,270
Higher rate: 40% on income from £50,271 to £125,140
Additional rate: 45% on income above £125,140

Dividend Tax Rates

Dividend tax currently operates at the following rates for 2025/26:[1][5][6]

8.75% (basic rate) on income up to £50,270
33.75% (higher rate) on income from £50,271 to £125,140
39.35% (additional rate) on income above £125,140

Important: From April 2026, dividend tax rates will increase by 2 percentage points:[4]

Basic rate rises to 10.75%
Higher rate rises to 35.75%
Additional rate remains at 39.35%

The £500 Dividend Allowance

You can receive up to £500 of dividend income entirely tax-free each year.[5][6] This means if you combine your personal allowance (£12,570) with your dividend allowance (£500), you can take up to £13,070 of dividends without paying any personal income tax—assuming you have no other income sources.

National Insurance Considerations

One of the most significant advantages of dividends is the complete absence of National Insurance contributions.[6] In contrast, bonuses attract:

Employee National Insurance at 8% above the upper earnings limit
Employer National Insurance at 15% (with some relief via the £5,000 employment allowance, subject to eligibility)[1]

This makes dividends considerably more efficient from an NI perspective, particularly for higher earners.

Corporation Tax Impact

When you pay a bonus, it reduces your company's taxable profit, lowering the corporation tax you owe. However, when you take a dividend, you must pay corporation tax first at:[1]

19% (small profits rate for profits under £50,000)
25% (main rate for profits over £250,000)
Marginal relief applies between these thresholds

This double taxation effect—corporation tax followed by dividend tax—is an important consideration when comparing the two options.

Practical Comparison: Bonus vs Dividend

To illustrate the difference, consider this scenario for a higher-rate taxpayer with £100,000 of company profit:[2]

Calculation	Bonus Route	Dividend Route
Company profit	£100,000	£100,000
Corporation tax at 25%	—	(£25,000)
Gross bonus/cash dividend	£86,957	£75,000
PAYE (45%)	(£39,131)	—
Employee NICs (2%)	(£1,739)	—
Dividend tax (39.35%)	—	(£29,512)
Net cash available	£46,087	£45,488

In this scenario, the bonus provides a marginal cash advantage of approximately £599, though the dividend tax isn't payable until 31 January 2027, providing a timing benefit.[2]

Which Option Is Right for You?

The decision between a bonus and a dividend depends on several factors:

Consider a bonus if:

You're a basic-rate taxpayer—the 20% income tax rate on salary is lower than the 8.75% dividend tax, but you must account for National Insurance costs
You want to reduce your company's taxable profit immediately
You prefer immediate income without waiting for dividend tax payments

Consider a dividend if:

You're a higher or additional-rate taxpayer—the tax savings from lower dividend tax rates outweigh corporation tax costs
You want to avoid National Insurance contributions entirely
Your company has sufficient post-tax profits available
You can manage dividend tax payments by the 31 January deadline

The Impact of April 2026 Changes

From April 2026, dividend tax rates increase by 2 percentage points, narrowing the tax advantage of dividends compared to salary.[4] However, dividends will likely remain more tax-efficient for higher-rate earners because they still avoid National Insurance contributions entirely.

Getting Professional Advice

The most tax-efficient income extraction strategy is highly personal. Factors such as your anticipated income level, whether you have other income sources, and your long-term business plans all play a role. As tax rules continue to evolve—including frozen income tax thresholds until 2031—it's worth reviewing your strategy annually.

For detailed calculations tailored to your specific circumstances, consider consulting with a qualified accountant who can run scenario-based modelling to compare both options.

Key Takeaways

Dividends offer lower tax rates and no National Insurance, but require corporation tax to be paid first
Bonuses are immediately deductible against profits but attract both income tax and National Insurance
For higher-rate taxpayers, dividends typically remain more tax-efficient despite the April 2026 tax increase
The £500 dividend allowance can shelter significant income alongside your personal allowance
Timing matters: dividend tax isn't payable until 31 January following the tax year
Your personal circumstances—income level, company profitability, and individual goals—determine the best approach

Sources

Topics

dividend taxbonus vs dividenddirectors salarytax efficiencycorporation taxnational insurancepersonal allowanceUK tax planning

Need help with your accounts?

Get in touch for a free, no-obligation consultation about your business finances.

Book Free Consultation Call +44 7367 056371

Dividend vs Bonus: The Tax-Efficient Choice for 2025/26